Supreme Court Pick Kavanaugh Likely to Restrict SEC Enforcement

By

Daren Fonda

July 10, 2018 9:10 a.m. ET

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In picking Brett Kavanaugh to replace Justice Anthony Kennedy on the Supreme Court, President Donald Trump chose a well-respected conservative jurist who’s likely to be quite friendly to business interests and financial firms.

Kavanaugh’s record suggests he isn’t a fan of major bureaucratic rule-making. And he’s unlikely to make it easier for class-action lawyers to file suits against big companies.

As a judge on the U.S. Court of Appeals for the District of Columbia, Kavanaugh dissented in a major securities fraud case now before the Supreme Court. In Lorenzo v. Securities and Exchange Commission,the D.C. appeals court ruled in favor of allowing a broader interpretation, in some instances, of a rule that prohibits misleading or false statements made by a financial representative (in this case, a broker who sent an email with false information about a clean energy company). Kavanaugh argued for a tighter standard, saying he would “vacate the SEC’s conclusions as to both sanctions and liability.”

Conservatives on the Supreme Court likely share Kavanaugh’s views, says Thomas Gorman, a partner at law firm Dorsey and Whitney (which wasn’t involved in the Lorenzo case). The case involves two prior decisions by the court, making it likely the justices will reject the SEC’s position and potentially scale back its ability to enforce its primary antifraud rule. “With Kavanaugh on the court, it seems almost a lock that Lorenzo will get reversed,” Gorman says.

The SEC has long sought to expand the scope of liability in fraud enforcement actions because it could ease the burden of proof. The Supreme Court has pushed back, however. Moreover, upholding the D.C. court’s ruling would expand the scope of liability in securities class-action suits and broaden the range of targets to encompass more companies—something the SEC also supports. But that’s also unlikely to fly with conservative judges.

“If you expand the definition of liability, you can add more people or companies as defendants,” Gorman says. “It’s a marquee case for the SEC and class-action attorneys. If Kavanaugh is confirmed, it could make a huge difference for class-action suits and for the SEC.”

The financial-services industry should be pleased with Kavanaugh, too. The industry recently won a big victory when a federal appeals court threw out the so-called fiduciary rule—a set of regulations on financial advice issued by the Department of Labor under President Barack Obama. The rules would have required financial firms or advisors giving advice on retirement accounts to put clients’ interests ahead of their own. The Trump administration never supported the rule, killing a potential appeal to the Supreme Court. The SEC is now working on a rule that would cover advice to investors more broadly, not just for retirement accounts.

Kavanaugh wasn’t involved in that case, but he has indicated opposition to agency rule-making that would have sweeping industry influence, without clear orders from Congress. “For an agency to issue a major rule, Congress must clearly authorize the agency to do so,” he wrote in an unrelated case, according to an editorial in The Wall Street Journal. “If a statute only ambiguously supplies authority for the major rule, the rule is unlawful.”

Lack of deference to regulatory agencies is a key selling point for conservatives, says Gorman. Trump’s last Supreme Court pick, Neil Gorsuch, opposed deference to regulatory agencies, and Kavanaugh appears cut from the same mold.

Several other cases already on the docket for the 2018-19 term could impact business interests, including cases involving arbitration agreements, employment discrimination, and intellectual property.

Perhaps the biggest case, though, is Apple v. Pepper—an antitrust case that could have broad impact in Silicon Valley and beyond.

Apple (AAPL) was sued in 2011 by iPhone users claiming the company abused its monopoly power to inflate prices on its App Store. Apple charges developers a 30% commission for apps sold through its store, and its iOS operating system prevents consumers from downloading apps outside Apple’s store—two practices at issue in the suit.

Apple says the plaintiffs don’t have a right to sue under U.S. antitrust law, partly because third-party developers set app prices, simply giving Apple a cut as the distributor. The Trump administration, which hasn’t always been friendly to Silicon Valley, supported a petition for the Supreme Court to hear the case and likely supports Apple’s views, says Adam Feldman, a legal scholar and author of the blog site empiricalscotus.com.

As it stands, the Ninth Circuit Court of Appeals sided with consumers. If the Supreme Court upholds the ruling, Apple could owe hundreds of millions of dollars in damages and may have to open its App Store or make other changes to its iOS operating system and relationships with software developers. A ruling against Apple could expose other tech companies that sell third-party products to more class-action suits, including Amazon.com (AMZN), Facebook (FB), and Alphabet (GOOGL).

But don’t hold your breath for a major anti-Apple ruling. The court is more likely to rule narrowly, says Feldman, continuing its “incrementalist” approach and kicking the broader antitrust issues back to the lower courts. That said, Apple’s likelihood of prevailing would get a boost with Kavanaugh on the court, given that he has taken a “pro-business stance” in many cases on the D.C. Circuit, says Feldman.

Of course, the ideological lines aren’t as clear-cut on business issues as they are on social matters (though they do tend to overlap). Justice Kennedy was unpredictable. He wrote the recent 5-4 opinion that paved the way for states to collect sales taxes from online retailers even if they don’t have a physical presence in the state, joining a liberal (Justice Ruth Bader Ginsburg) in the majority. He also joined liberals in upholding a key provision of the Affordable Care Act in 2015, in a 6-3 ruling. But he sided with conservatives in an earlier dissent on the individual health-insurance mandate (an Obamacare provision requiring all individuals to buy insurance).

Kavanaugh, who clerked for Kennedy, is a “predictable conservative,” says Eric Citron, a Supreme Court attorney in Bethesda, Md., who clerked for Justices Sandra Day O’Connor and Elena Kagan. “In a lot of Kavanaugh’s decisions regarding big businesses, he ruled in favor of employers.”

Citron adds that the court, under Chief Justice John Roberts, has shown an interest in taking more swings at major regulatory and business issues, “dealing with broad strokes of business interests.” Taking a higher proportion of such cases indicates the court wants to make an impact on business and financial regulation.

Feldman expects Kavanaugh to enhance the pro-business momentum that has been building on the court for years. “We’ve seen lots of movement by the conservative majority in that direction,” he says. “It would be shocking if we see anything else from Kavanaugh.”

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Supreme Court Pick Kavanaugh Likely to Restrict SEC Enforcement

In picking Brett Kavanaugh to replace Justice Anthony Kennedy on the Supreme Court, President Donald Trump chose a well-respected conservative jurist who’s likely to be quite friendly to business interests and financial firms.

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